Saudi Surprise: This Could Cause a Major Panic


I hope people around the world are feeling flush this year. There’s a hell of a lot of money that needs to change hands.

Uber insists that it’s on track for an initial public offering (IPO). It was valued at US$76 billion during its previous round of fundraising.

It will likely shoot to raise more than US$100 billon on the stock market this year.

That’s an enormous figure.

But perhaps the one to watch is Saudi Aramco — the national oil company of Saudi Arabia.

It could be looking to raise possibly US$70 billion in the bond markets this year.

That’s to help fund a major acquisition.

Oh, and what’s this?

A new report has conveniently appeared updating Saudi oil reserves. It’s the first independent update in 40 years.

Today’s Profit Watch digs further into the story, and why you should care…

Here’s the deal…

Saudi Arabia originally planned to sell a 5% stake in Saudi Aramco last year.

That plan surfaced in 2016.

The Saudis wanted a US$2 trillion valuation for Saudi Aramco. That would’ve raised US$100 billion to fund the Saudis’ plan to diversify their economy.

The Aramco IPO has been pushed back, possibly to 2021.

One thing that held back the Aramco IPO was the lack of disclosure around its oil reserves and its financial accounts.

As above, there’s been no independent assessment of Saudi reserves for 40 years — until now.

Many people have been sceptical — for years — of how big the Saudi reserves are. A man called Matthew Simmons wrote a book over a decade ago called Twilight in the Desert.

I haven’t read it, but the gist is that he argued the Saudis were overestimating their reserves and oil would go to very high prices (US$200 a barrel). 

He was wrong.

However, recently this viewpoint resurfaced.

260 billion barrels — since 1988

Here’s why: All the major Saudi oil fields have been producing for decades. The massive Ghawar field was put into production in 1951.

Despite the Saudis pumping three billion barrels of oil a year, their reserve figure has always stayed the same at its last final, Saudi estimate — 260 billion barrels.

And now a third party says that it’s actually gone up!

Here’s one thing that gives me pause.

I recently read a book about the scandal surrounding the Malaysian sovereign wealth fund, known as 1MDB.

Part of that story shows that one way this fund was able to raise money — we’re talking billions – was using an oil investment as a reason.

The fund paid a well-known Wall Street oil analyst US$100,000 to write a report — in two days — justifying the valuation of the oil reserves.

It was a case of extrapolating certain figures and computing certain assumptions.

He didn’t do anything illegal. Let us just say it was ‘convenient’.

To be fair to Saudi Arabia, it has used a prestigious auditing firm here.

The firm claims to have hired more than 60 geophysicists, petrophysicists, geologists, simulation engineers, reserves engineering specialists and economists over 30 months.

This new report is not available publicly, as far as I know.

Good timing, however…

A potential ‘Soros’ trade here?

Here’s one thing we can say for certain: Foreign investors will be much more comfortable funding Saudi Aramco’s bond issuance this year, and any future IPO of Saudi Aramco, with this audit now out there.

This audit takes away one worry from dealing with Saudi Aramco — at least for the investment banks that arrange these deals.

Here’s the astonishing earning power of this firm.

Saudi Aramco can produce oil at US$4 a barrel. Hence the extreme wealth of the Saudi royal family.

However, let me throw something out there, in the full knowledge we’re considering a speculative idea.

Venezuelan oil production continues to decline. It’s now going under one million barrels a day.

Libya is in a low simmering civil war, and Nigeria still has militants in its oil-rich Delta region.

Norway has now come out and said its production will be lower than previously forecast, and at a 30-year low.

Iranian oil is heavily shut out of the global oil market.

Suffice to say, away from the US, many major oil producers are not exactly flying right now.

One wonders if, at some point, Saudi Arabia will be called upon to fill a potential gap if this worsens. And here’s the point for today: it may not be able to do it.

That could send the oil market into a major panic.

An audit is one thing…actual production quite another.

It’s taken for granted that Saudi Arabia can always pump more oil.

The latest news about this audit could inject a level of complacency around this back into the market.

But, to paraphrase George Soros, it’s the potential false narrative that can be the lucrative one to bet against.

Keep watching.

All the best,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch